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Top Ten Trader
Discover the Market’s Strongest Stocks

March 10, 2014

For the past few sessions, we’ve seen something of a rolling correction among many leading growth stocks as traders book profits. There’s been a little abnormal action out there--some “late-stage” leaders have cracked, signs of speculation are apparent and a few stocks went parabolic on the upside. However, the vast majority of stocks are still acting normally, simply pulling back on generally light volume after big run-ups.

Shaking the Tree

Last week we wrote that usually the first shakeout after a multi-week thrust isn’t the last, and indeed, we’ve seen some follow-on profit-taking among the market’s strongest stocks. There has been a little abnormal action here and there (mostly in biotech, but some elsewhere, too), but so far, the vast majority of stocks are simply pulling back after big-volume moves to new highs. If the selling spreads and the uptrend fails, then we’ll change our advice. But, as usual, we advise going with the weight of the evidence, which today remains bullish. Thus, hold your top performers, and adding a stock or two on dips is still favored.

This week’s list has a diverse flair to it—it’s not all high-flying stocks like we saw during February. But there is still plenty to like, including our Top Pick, Novo Nordisk (NVO), which has a solid growth story and a chart that’s at a fine entry point.

Stock NamePriceBuy RangeLoss Limit
Under Armour (UA) 0.00110-11599-102
Trina Solar (TSL) 0.0017-1814-15
SouFun (SFUN) 0.0088-9078-80
Qihoo 360 (QIHU) 0.00112-12097-100
Novo Nordisk (NVO) 0.0044.5-46.541-42
MasTec, Inc. (MTZ) 66.6540-4237-38
Magna International Inc. (MGA) 0.0094-96.588-89
CoStar Group (CSGP) 589.55200-208182-185
Athenahealth (ATHN) 0.00178-182154-156
Alaska Air Group (ALK) 0.0087-9080-81

Under Armour (UA)

Why the Strength

Under Armour’s big idea is simple—it’s the next Nike, with tons of innovative athletic apparel, accessories and footwear that are continuously gaining market share. It started with moisture-wicking fabrics for athletes, but it’s moved beyond that with the company’s Armour Vent (improved ventilation design for shirts, etc.), ColdGear Infrared (lightweight apparel that helps athletes stay warmer longer in the cold) and, coming this year, the firm’s SpeedForm Apollo running shoe, which is form fitting, has molded seamless heel cups and weighs around 6.5 ounces! Combine these products with excellent marketing and distribution prowess and Under Armour has been a model of consistent growth for years—its apparel revenues have grown 20% or more for 17 straight quarters, and the fourth quarter of 2013 saw a big acceleration in business, with apparel (and total net) revenues up 35%, blowing away estimates. Of course the story isn’t unknown at this point; the stock trades at a huge valuation, though it’s worth noting that Nike’s current market cap is still nearly six times that of Under Armour’s. A major misstep in product development or loss of market share would sting, but big investors believe the odds of that are low given the firm’s history. We like it.

Technical Analysis

UA has been in a choppy uptrend for years, making big upward progress but with lots of corrections and consolidations along the way. The latest pause lasted from September through mid-January, with UA jumping around the 85 level, before a huge-volume earnings move (eight times average volume!) changed the stock’s character. It’s reached as high as 120 before pulling back a bit during the past two weeks. We think dips toward the 25-day line (now around 111) are buyable, with a stop near 99.

UA Weekly Chart

UA Daily Chart

Trina Solar (TSL)

www.trinasolar.com

Why the Strength

Trina Solar is a Chinese maker of solar modules that sells its wares globally. The solar story is one of the phoenixes of growth stocks, periodically dying and being reborn. The industry died in 2008 when the global recession killed off the various incentives and subsidies that had been supporting a wave of solar installations and a glut of capacity crashed prices. Now, with feed-in tariffs and subsidies back in high gear and a leaner industry created by consolidation and bankruptcies, solar is thriving again. One major change for Trina is that China is now its best customer, accounting for 40% of Q4 sales, replacing Germany, which contributed 30% in 2012. The U.S. is Trina’s second-best customer with 17%, followed by the U.K. with 15%. The company is emerging from a string of money losing years, with profits in Q3 and Q4 following eight quarters of losses. The company’s unexpectedly strong Q4 earnings report caused an 11% jump in its stock price on March 4, and that was followed by an analyst’s upgrade on March 6. The consensus now is that the company’s strong balance sheet will give it the capital to build higher manufacturing capacity and continue to grow.

Technical Analysis

TSL came out of its disastrous 2011–2012 price slump trading at 2 in late 2012. It’s well off that bottom now, but it remains a very volatile stock (beta is 2.7, which means it’s almost three times more volatile than average). The stock made three attempts to get past resistance at 18 in October and November, but slipped back to 11 in December. Renewed buying this year finally sent it above 18 for a couple of days last week, but the weight of the market has once again pulled it below 18. If this market pullback continues, you might be able to buy in nearer 17. Use a relatively loose stop at 15 to avoid getting stopped out.

TSL Weekly Chart

TSL Daily Chart

SouFun (SFUN)

www.soufun.com

Why the Strength

The health of real estate in China has been of great interest to the rest of the world for a couple of years as investors try to figure out whether there’s a bubble or not. But there’s no denying that the market has been hot. SouFun operates a leading online real estate portal in China, providing marketing, e-commerce, listing and other services to real estate developers, agents and buyers. The company will also sell new home buyers the furniture they need to set up their new digs. The company’s 100 offices focus on local markets—its extensive database features content that covers more than 330 Chinese cities. One unique SouFun feature is a paid membership card that gives members discounts on residential properties from its developer partners. SouFun has been routinely profitable, with nine years of increasing EPS and two quarters of after-tax profit margins above 50%! Q4 earnings growth was 80% and revenue growth was 47%. The company has been thriving as a wave of urbanization continues to swell Chinese cities, creating a huge demand for housing. SouFun is also finding favor with investors as part of the Chinese Internet sector, which has been on a roll for more than a year.

Technical Analysis

SFUN came public at 11 in September 2010, but had a hard time gaining traction. The stock finally got in gear in July 2012, when it began a low-volume rally that pushed it from 11 to 29 in January 2013. A six-month consolidation kept the stock pinned between 20 and 29 until July 2013, when the stock not only got moving, but also began to pick up some serious trading volume. SFUN reached 92 in January, corrected to 74 in late February and has just blasted off to new highs over 90 on monster volume. The stock spiked as high as 100 last Thursday, but has cooled to just above 90. With a little patience, you should be able to get in at 90, with a stop a little below 80.

SFUN Weekly Chart

SFUN Daily Chart

Qihoo 360 (QIHU)

www.360.cn

Why the Strength

Qihoo 360 is China’s leading online security vendor, has a leading App Store and game platform in China, and thanks to a big move last year, is now one of the largest search engines in China. The company has been doing good business for years, but it’s the gaming boom and its explosive growth in online search that is driving results through the roof. In the fourth quarter, the firm’s Internet value-added services (read: game) revenue soared 124% to $79 million (and up nearly 18% from the prior quarter), while online advertising revenue (driven mainly by paid search) totaled $142 million, up 113% from a year ago (and also up 18% from the prior quarter). And the underlying metrics that are driving the firm’s sales and earnings spike look great—Qihoo’s search share leapt to 23% in the fourth quarter, with management aiming for at least 30% by year-end 2014; clicks and user visits to its start-up page are growing at 30% to 50% rates, and its browsers are used by 70% of PC users in China. All of the numbers crushed estimates, and the top brass’ outlook for the first quarter was also well ahead of expectations. Long-term, the biggest opportunity here is paid search; Qihoo accounts for nearly a quarter of all searches, but collects just 1% to 2% of the industry’s paid-search revenue. Obviously, those figures are starting to converge, and as they do, Qihoo’s bottom line could go through the roof. It’s not cheap, but given the triple-digit sales and earnings growth, as well as huge profit margins, we think the potential upside is huge.

Technical Analysis

QIHU has finally emerged from a tedious, sloppy, four-month basing period, which came after a huge, powerful run-up (13 weeks up in a row, big expansion in volume, etc.). In recent weeks, even as the stock moved higher, it was hard to get a hold of; QIHU’s swings are extreme on a daily basis, which isn’t ideal. That said, the stock did show some power last week, and held all of its gains post-earnings. A pullback is possible, but we think the path of least resistance is up, and as long as the market remains healthy, the upside could be big. Start with a small position so you can handle the volatility.

QIHU Weekly Chart

QIHU Daily Chart

Novo Nordisk (NVO)

www.novonordisk.com

Why the Strength

Novo Nordisk is one of the world’s leading producers of human insulin, insulin analogues, injection devices and education materials, controlling 27% of the total diabetes care market. The company’s leading products include a fast-acting insulin called NovoRapid, which sports sales of $2.8 billion annually, and Victoza and Levemir, which both earn more than $1.5 billion per year. But Novo’s biggest potential blockbuster could be still in the pipeline. That’s Tresiba, which requires a cardiovascular study to receive FDA approval, and is designed for type-2 diabetes treatment—a market that is expected to grow to $50 million by 2021. The type-2 diabetes market is already a major market, however, with Lantus (the leading type-2 treatment made by Paris-based Sanofi) raking in more than $6.5 billion last year. Elsewhere, Novo (in a partnership with Merrion Pharmaceuticals) is on the cusp of developing the Holy Grail of diabetes treatment: an oral insulin pill. The company recently completed a single dose Phase I trial with oral insulin (NN1956). Lastly, Novo showed at the end of January that it’s still sitting on solid fundamentals, posting stronger-than-expected fourth-quarter earnings, with total revenue adding 10% and earnings up 8% year-over-year.

Technical Analysis

With the exception of a modest correction in mid-2011, NVO has been in rally mode since the market hit bottom in March 2009. Throughout this rally, NVO has largely enjoyed the support of its 10 and 25-week moving averages, save for the 2011 correction. More recently, NVO spent six months consolidating in the 35 region, waiting for its weekly trendlines to play catch-up. Strong quarterly earnings finally stirred NVO from its rest, sending shares sharply higher along their 10-day and 25-day moving averages. The stock is now hovering just north of the 45 area, as investors digest NVO’s post-earnings gains. We believe NVO is buyable here, or on controlled dips of a point or two.

NVO Weekly Chart

NVO Daily Chart

MasTec, Inc. (MTZ)

www.mastec.com

Why the Strength

MasTec is not your ordinary ditch digger. The company is an infrastructure construction specialist, providing services for telecom vendors, wireless providers, cable TV operators, and energy and utility companies. Essentially, MasTec digs trenches, lays cable and builds telecom towers. The company sports more than 350 customers with more than 400 locations across the U.S. MasTec has been impressive during the past six years, with revenue rising from just under $1 billion in 2007 to more than $4.3 billion in 2013. The company’s most recent display of earnings prowess has placed it on many investors’ radars, with MasTec reporting early last week that fourth-quarter earnings jumped 23% to $123 million, as revenue for the period rose 24%. Full-year 2013 revenue came in at a record $4.3 billion. MasTec saw strong growth across the board in 2013, with Oil & Gas revenue up 70% year-over-year, Transmission revenue up 37%, and Wireless revenue up 38%. The company expects its wireless business to remain strong in 2014 with the rapid expansion of LTE taking place across several major carriers, while its wireline business is expected to grow significantly after multiple carriers announced 1 gigabit speeds and fiber network expansion. As a result, MasTec lifted its 2014 revenue forecast to around $4.65 to $4.7 billion, representing strong double-digit percentage growth.

Technical Analysis

After spending 2012 bouncing around in the high teens, MTZ finally garnered some serious buying support late in the year. Rallying along its 10-week and 25-week moving averages, the stock bested former resistance at 20 in September 2012 and finally topped out near 31 in March 2013. In the wake of the rally, MTZ entered a nine-month long basing period in the 30-35 region, with shares consolidating into their weekly trendlines. Shares once again stirred at the turn of 2014, topping 35 by mid-January and making a run at 40. MTZ finally topped 40 early last week, with the stock rallying on strong volume in the wake of MasTec’s quarterly report. The stock may be a bit overheated due to brisk post-earnings buying, so buying dips at this point is recommended.

MTZ Weekly Chart

MTZ Daily Chart

Magna International Inc. (MGA)

magna.com

Why the Strength

If your vehicle has it, chances are Magna International makes it. The company manufactures practically everything needed to assemble a motor vehicle. The company’s largest division, Magna Steyr, provides vehicle engineering and assembly, while the company’s interior and exterior systems division makes trim, lighting, sealing systems, instrument and door panels, and sound insulation. The Cosma International unit makes body and chassis systems; Magna Powertrain makes transaxles, transmission systems, and engine parts, while Magna Mirrors makes mirrors and driver assistance products. As you can see, as long as the auto industry is doing well, so is Magna. The company has enjoyed strong revenue during the past several years, banking off double-digit annual sales growth in light vehicles since 2009. What’s more, Magna recently reported record fiscal 2013 revenue and earnings, which rose 13% to $34.8 billion and 26% to $7.23 per share, respectively, with gains driven by increased production sales in North America, Europe and Asia, as well as higher tooling, engineering sales and improved complete vehicle assembly sales. Looking ahead, Magna sees continued double-digit light vehicle sales in the U.S. and Europe, as well as a 30% increase in “rest of world”—i.e., outside U.S., Europe and Asia.

Technical Analysis

Following a choppy 2012, MGA saw a strong steady rally throughout 2013. Shares gained nearly 70% last year, garnering key support from their 10-week moving average. Heading into 2014, MGA pulled back from highs near 90 to enter a brief consolidation period in the 80 region. Shares recovered quickly, and, after a test of support at their 50-day moving average, once again resumed their march higher. This uptrend received a shot in the arm last week, as MGA surged more than 10% on strong volume to trade in multi-year high territory north of 95. Shares are currently forming a base in the area, with support emerging near 95. MGA is buyable here, or on a dip of a point or two.

MGA Weekly Chart

MGA Daily Chart

CoStar Group (CSGP)

www.costar.com

Why the Strength

CoStar (like SouFun, which appears later in this issue) is a provider of online real-estate information. But unlike SouFun, CoStar is concentrated exclusively on commercial real estate, including listings of available properties, values and market news and conditions. The company’s marketplace has more than 7 million registered users and its various websites have more than 10 million unique monthly visitors in aggregate. With offices throughout the U.S. and Europe and a worldwide staff of about 2,000, CoStar is the default source of information for those seeking to buy or sell commercial real estate. The company’s latest quarterly earnings report featured a strong 70% jump in earnings on a 16% gain in revenue with an all-time high of 19.1% in after-tax profit margin. CoStar just announced that it is buying the website apartments.com and associated websites from Classified Ventures for $585 million. This follows the company’s 2012 buyout of rival LoopNet for $860 million, a move that secured CoStar’s position firmly at the top of the commercial real estate information food chain. As the global economy continues to improve, commercial real estate will do the same, with positive prospects for CoStar.

Technical Analysis

CSGP has been a relatively steady performer, outperforming the broad market since early 2012. The stock experienced a pullback from 186 in December to 164 in January, but broke out decisively to new highs on February 21 after a great earnings report. The stock has since popped higher on news of the apartment.com acquisition. The few days of correction in CSGP hasn’t even pulled it back to its post-earnings high, so the chart looks very healthy. Assuming that CSGP resumes its more-sedate pace of advance, it should be a good choice for a long-term buy. A stop at 185 looks reasonable.

CSGP Weekly Chart

CSGP Daily Chart

Athenahealth (ATHN)

www.athenahealth.com

Why the Strength

Athenahealth is a Massachusetts-based technology company that helps medical practices by automating their billing, collections and medical records. The company’s Cloud-based software also enables hospitals to track patient care across settings, networks and different health information technology (HIT) systems. The benefits to physicians include faster payments, improved collections and automatic updates based on changing insurance reimbursement regulations. The company operates on a subscription basis and has been a consistent moneymaker, increasing EPS every year since 2005. The most recent surge of investor interest came after the company’s Q4 earnings report showed earnings up 97% and revenue up 48% from year-ago levels. The 57 cents of EPS beat estimates by 13 cents and revenue came in at $172 million, about $3 million above predictions. The company’s 2013 acquisition of Epocrates, a medical app maker, proved to be especially helpful to the results. Interestingly, some analysts are seeing a huge opportunity in the upcoming revamp of the World Health Organization’s disease codes, which is expected to bring more than 10,000 new subscribers to Athenahealth as they try to avoid the chaos of handling the new system.

Technical Analysis

ATHN soared from 138 to 157 after its triumphant earnings results on February 7, then continued to soar, topping 200 over the past few weeks. Last week brought a couple of analysts’ downgrades on valuation grounds and a pullback to 184. It’s worth noting that short interest in ATHN has been high, totaling nearly 12 days of trading volume in February, and this could lead to a short squeeze if the stock takes off again. We think ATHN is buyable right here, or on further weakness to 180. Use a stop at the top of the earnings gap at 156.

ATHN Weekly Chart

ATHN Daily Chart

Alaska Air Group (ALK)

alaskaair.com

Why the Strength

Alaska Air Group (which includes Alaska Airlines and Horizon Air) is thriving thanks to stagnant fuel costs, seemingly sustainable and elevated ticket prices and a gradual expansion of routes as the behemoths of the industry slowly cut back on unprofitable trips. It’s not nearly as growth-oriented as its peer Spirit Air, but available seat miles grew about 8% last year, and are up another 4.2% through the first two months of 2014. That’s helped revenue creep higher at high single-digit rates, which, combined with stable costs (Alaska inked a five-year deal with a couple of its biggest employee groups last year), has helped sales and earnings push consistently higher during the past few years. That’s really all there is to the story—solid execution, steady expansion and favorable industry conditions as airline companies refuse to get cutthroat in terms of pricing. One thing that is unique, however, is Alaska’s shareholder-friendly management, which has a history of share buybacks (about 3.5% of the total in 2013), and last year, initiated a dividend for the first time since 1992. (It just bumped up that dividend, which now yields a modest 1.1%.) All told, it’s a leader in a strong group that should do well (analysts see earnings up 21% this year) as long as conditions remain favorable.

Technical Analysis

ALK has been in a long-term uptrend since the market’s bear market low of 2009, but there have been plenty of multi-month corrections and consolidations along the way. The latest of those started last May and, by our measures, lasted through the rest of last year; the stock was not much higher at the start of the year than it was seven months before. ALK also had some gyrations during the market’s January correction, but has been very strong during the past three weeks, pushing to new price and RP line highs. If you’re game, you could buy some here or, preferably, on weakness, with a stop near 80.

ALK Weekly Chart

ALK Daily Chart

Previously Recommended Stocks

Below you’ll find Cabot Top Ten Trader recommended stocks. Those rated HOLD are stocks that traded within our suggested buy range within two weeks of appearing in the Top Ten and still look good; hold if you own them. Stocks rated WAIT have yet to dip into our suggested buy range … but can be bought if they do so within the next week.

Those stocks rated SELL should be sold if you own them; they will no longer be listed here. Finally, Stocks in the DROPPED category are those that failed to trade within our buy range within two weeks of our recommendation; that’s not a bad thing, we just never got the price we wanted. Please use this list to keep up with our latest thinking, and don’t hesitate to call or email us with any questions you may have. New recommendations each week are in green.

FirstStockSymbolTop PickOriginal Buy RangePrice as of March 10, 2014
HOLD
7/1/13ActavisACT123-127209
12/16/13Advance Auto PartsAAP104-108127
2/14/14AerCap HoldingsAER
icon-star-16.png
41-4343
3/3/14Basic Energy ServicesBAS21.5-2324
12/2/13Biogen IdecBIIB
icon-star-16.png
285-295338
10/7/13Canadian SolarCSIQ17.5-1936
9/16/13Cheniere EnergyLNG30-3251
12/2/13DexcomDXCM33-3546
2/14/14DomtarUFS104-110109
2/17/14E*Trade FinancialETFC21-2223
8/12/13FacebookFB37.5-39.572
1/13/14FireEyeFEYE53-5780
2/14/14Freescale SemiFSL21-2223
10/21/13GoogleGOOG980-10001212
3/3/14Green Mountain Coffee RoastersGMCR105-112104
12/9/13Harman InternationalHAR
icon-star-16.png
78-80109
11/18/13HomeAwayAWAY
icon-star-16.png
35-3746
10/28/13IlluminaILMN90-92167
2/10/14Incyte PharmaceuticalsINCY62.5-6563
1/27/14InsuletPODD41-4348
2/3/14Keryx BiopharmaceuticalsKERX14-15.515
1/20/14ManitowocMTW23.5-2530
8/26/13Melco CrownMPEL26-2744
8/20/12Michael KorsKORS
icon-star-16.png
49-5398
2/17/14Monster BeverageMNST70-71.573
2/14/14Nabors IndustriesNBR21-22.523
2/14/14O’Reilly AutomotiveORLY150-155151
1/20/14Pacira PharmaceuticalsPCRX63-6574
1/20/14Palo Alto NetworksPANW60-62.578
1/13/14PandoraP31.5-33.536
3/3/14Penn VirginiaPVA14-14.515
2/17/14ProofpointPFPT37.5-40.543
5/28/13Qihoo 360QIHU42-44119
3/3/14Regeneron PharmaceuticalsREGN320-330329
2/14/14RetailMeNotSALE41-4341
12/30/13Royal CaribbeanRCL45-4751
11/18/13Salix PharmaceuticalsSLXP
icon-star-16.png
86-88110
2/3/14Sangamo BioSciencesSGMO16.5-18.523
1/20/14SolarCitySCTY70-7476
11/18/13Southwest AirlinesLUV17.5-18.524
10/21/13Spirit AirlinesSAVE
icon-star-16.png
40-4360
1/13/14SplunkSPLK72-7485
2/17/14Tesla MotorsTSLA190-195239
11/4/13Trinity IndustriesTRN50-5273
2/10/14USG Corp.USG31-3335
1/13/14United ContinentalUAL43-4547
10/28/13United RentalsURI
icon-star-16.png
63-6592
9/30/13Vipshop HoldingsVIPS53-57158
12/2/13WorkdayWDAY78.5-81.5101
9/30/13Wynn ResortsWYNN152-157241
1/13/14YelpYELP74-7893
1/6/14YY Inc.YY
icon-star-16.png
54-5884
WAIT FOR BUY RANGE
3/3/1458.comWUBA46-4852
3/3/14Avis BudgetCAR
icon-star-16.png
44-4748
3/3/14Signet JewelersSIG93-9598
3/3/14Trimble NavigationTRMB36-3839
SELL RECOMMENDATIONS
2/3/14Concur TechnologiesCNQR113-115113
8/5/13Gilead SciencesGILD59-6180
1/6/14Jazz PharmaceuticalsJAZZ120-127152
1/13/14MedivationMDVN68-7069
1/27/14Valeant PharmaceuticalsVRX125-131141
DROPPED: Did not fall into suggested buy range within two weeks of recommendation.
None this week.